Why Do Auditors Over-Rely on Weak Analytical Procedures? The Role of Outcome and Precision

Abstract

Recent evidence from highly publicized frauds and from the Public Oversight Board's Panel on Audit Effectiveness (2000) indicates that auditors sometimes over-rely on evidence provided by weak substantive analytical procedures. In Experiment 1 we examine whether auditors' assessments of evidence quality are affected by a “favorable outcome” bias, manifested when an analytical procedure indicates that the balance under examination is fairly stated. In Experiment 2 we examine whether an explicit ex ante prompt can activate knowledge that will sensitize auditors to the weaknesses of an unreliable substantive analytical procedure. The first experiment provides evidence that auditors attribute more strength to a weak, aggregate-level analytical procedure that produces an expectation that is not significantly different from the unaudited numbers (i.e., a “favorable” outcome), than to the same analytical procedure that produces an expectation that is significantly different from the unaudited numbers. Further, auditors in the “favorable outcome” condition adjust their initial assessments down to a level very similar to that of auditors in the “unfavorable outcome” condition after seeing a more precise analytical procedure, while auditors in the unfavorable outcome condition do not change from their initial assessment after seeing the more precise procedure. Taken together, our results suggest that when a low-quality analytical procedure yields no significant difference, auditors tend to overestimate the strength of the evidence provided. Results from the second experiment indicate that the explicit consideration of potential weaknesses associated with the highly aggregated analytical procedure reduces auditors' assessments of the strength of evidence obtained from the aggregate procedure. Subjects' explanations suggest that the prompt activated their knowledge of the factors contributing to the quality of the analytical procedure.